Solopreneur: Are you making a profit or going down the drain?

That’s what the desperate voice quavered. I could only imagine the fears that clutched at this woman’s heart.

This couple has a small business that they work together. And they knew that something was wrong because it was becoming increasingly difficult to make ends meet. They were both working hard but the apparent bottom line just wasn’t what it should be.

I say ‘apparent bottom line’ because they did not really know what the bottom line was.

It is an unfortunate fact that many solopreneurs and small business owners do not know how much money — gross or net — that they are actually bringing in. They assume if there is money in the bank, they are doing well. On the other hand, if they are unable to pay their bills, they must not be making enough (which is likely true).

The equation is pretty simple: If you are not making ends meet then either decrease spending or increase income.

“Duh!” you might say and I wouldn’t blame you. Of course, there are more parts to the equation, but the key is to…

Get a handle on your cash flow

Before you can figure out how to make ends meet, you have to figure out how far apart the ends are to begin with. If you aren’t clear on this point, you will never know if you are making “enough” money. Be thorough and realistic. List all expense items and the assumed dollar figure for each.

Start with your living expenses and calculate how much take home money you need to make. This would include:

$ Rent or mortgage

$ Utilities

$ Car payment

$ Car maintenance

$ Groceries

$ Clothing

$ Entertainment

$ Emergency fund

$ Insurance

$ Education

$ ???

Next, calculate how much money your business needs to make to cover operating expenses such as:

$ Rent

$ Utilities

$ Office supplies

$ Business registration and licensing

$ Website hosting/domain name

$ Computer hardware and software

$ Industry memberships

$ Work clothes/uniforms

$ Insurance

$ Education/training

$ Accountant/bookkeeper

$ Advertising/promotion

$ ???

Once you add up these costs, you know how much money your business needs to bring in each month.

So, now you need to look at your net (after you pay your taxes) income. Is your business actually bringing in enough money to cover your expenses (both home and business)? If not, you may need to assess your pricing and fees.

Questions to ask about your pricing

If you are a product-based business, you will want to determine if your product price is realistic:

Are you charging enough per widget to cover the manufacturing costs of the widget, including all parts (even those miscellaneous small parts like glue, screws and staples)?

Do you include the shipping cost of the parts in the price of the widget?

Do you include your labor? Too many entrepreneurs forget to pay themselves for the time they spend making each widget. Your labor is NOT free and you will never make a decent profit if you don’t include labor in your pricing.

Once you know your pricing, how many widgets per month do you need to sell to meet your expenses?

Are you charging your customers to ship the goods to them? There are a surprising number of solopreneurs who do not – because they feel “guilty” about the added cost to the customer!

What are your payment terms (payment on delivery? Deposit with balance due? 30-days?)

If you are a service-based business/consultant:

Do you offer hourly rates or package pricing?

Does your fee include overhead expenses (see point #2 above)? Using your phone, computer, printer and paper can all be client expenses to consider.

Are you realistic about how much work you do for clients outside appointment times?

Another factor

Surprisingly — or maybe not so surprising — another reason solopreneurs fail to see a profit is lack of organization. Invoices are not sent promptly (or are not sent at all!), there is no follow-up scheduled for collections, and parts are not ordered in a timely manner – all because there is no system in place. But that’s another post…

Are you struggling to make ends meet as a solopreneur? What do you think is the cause? Let us know in the comments below!